Savills Studley Office Report: Shifting Concessions

Per the firm’s 2018 Effective Rent Index, rates continue to increase and concessions remain on the downswing in tech-centric cities, while markets dependent on traditional users experience the opposite.

In the Class A segment of the U.S. office sector, coveted concessions abound—for some, according to commercial real estate services firm Savills Studley’s 2018 Effective Rent Index. New developments and repositioned properties have produced plentiful supply in some gateway markets, and landlords are responding with special deals in an effort to lease-up properties. However, the limited pool of premier offerings in tech hubs is having a converse effect, with concessions on the downswing and prices on the rise.

Per the Savills Studley report, tech firms are willing to pay big-ticket prices for space, particularly cutting-edge space. “Talent and quality office space both come at a high price, even in many of the markets such as Atlanta and Dallas where developers used to be guilty of overbuilding nearly every cycle,” Keith DeCoster, director of U.S. Real Estate Analytics with Savills Studley, told Commercial Property Executive. Atlanta’s tech sector accounts for an increasing percentage of the employment market, and the city experienced the largest upsurge in effective rents of the 20 major metros surveyed and the greatest drop in concessions; rents climbed 12.7 percent in 2017 and concessions dropped 4.1 percent. In Silicon Valley’s Sunnyvale/Santa Clara area—home to the likes of Apple, which occupies the entire 350,000-square-foot Crossroads III office campus—rents rose 3.8 percent, and concessions dropped 3.2 percent.

It’s a different world, however for tenants in markets where tech isn’t king. “Traditional professional/business services firms and law firms are still keeping an eye on out-of-pocket expenditures,” DeCoster said in a prepared statement. “Fortunately, ample supply in many of the gateway markets is compelling landlords to offer record concessions, making conditions ideal for tenants.” Concessions packages skyrocketed 21.7 percent in Washington, D.C., and tenant effective rents in the nation’s capital dropped 1.5 percent. The same dynamic can be seen in Denver, where concessions rose 16.7 percent and rental rates dropped 2.8 percent.

Overall, 12 of the 20 cities analyzed in the report recorded an increase in concessions and a decrease in tenant effective rents.

Unexpected results

The tech industry’s strong impact on the Class A office sector is a trend seen in previous Savills Studley Rent Index reports; however, the 2018 report did yield a few unanticipated results. “Two things are surprising—the sustained levels of demand for premium office space and the continued development restraint. Both may be attributable to rising costs,” DeCoster told CPE. In the central business district of Tampa, Fla., consistent leasing activity along with controlled construction pushed tenant effective rents up 10.3 percent in 2017. The same dynamic is evident in Phoenix, where constrained development and sustained user demand caused rents to jump 13.2 percent.

Change, however, may be on the horizon, according to the Savills Studley report. “Demand is already starting to wane in a few markets,” DeCoster noted. “It will be interesting to see if all markets stick to their controlled development pipelines.”